Stock Market Forecast to Consolidate, Euro Hype Over?

By: Graham_Summers

Last week’s explosive rally was due to three factors:

1. Stocks came perilously close to breaking down so the PPT stepped in
2. A bullish falling wedge pattern in stocks
3. Euro options expiration/ ECB intervention

Regarding #1, stocks came right on the verge of breaking below their 50-DMA. Given the technical nature of the stock market rally (the market hasn’t traded based on fundamentals in months) this would have heralded a major decline.

With the Fed and the US Government’s claims of a recovery hinging largely on the fact stocks are up, the powers that be couldn’t possibly allow this, so what do we get? A ramp job that takes stocks up nearly 4% in three days.

From a technical picture, this move was predicted by the bullish falling wedge pattern that formed over the preceding three weeks (see the chart below). Of course the only reason this pattern formed in the first place was because “someone” stepped in and propped stocks up every time they came close to breaking below 1175.

Regardless, the ramp job that occurred Wednesday through Friday satisfied this pattern. As I write, the S&P 500 has failed to best its early November intraday high (1227). A move above that level could portend a greater breakout, however, this will all hinge on the Euro.

Last week was options expiration week for the Euro. Already oversold, the currency was due for a bounce. Options traders took advantage of this to gun the Euro higher when rumors swirled that the European Central Bank would potentially issue a larger bailout.

Nevermind that the rumors proved false or that the European Union continues to collapse, in today’s market it’s trade first and think later. With that in mind, I want to note that the Euro is now coming up on major resistance.

If the Euro rises to break into the gap then we’re likely to see a move to 136, which would correlate to the S&P 500 breaking out to new highs. However, given how fragile things are in the Euro zone, this move could also be finished and we’re heading back down to new lows in due course.

Indeed, the big picture here hasn’t changed. The Euro is destined to make new lows having already been rejected at its multi-year trend-line. Given the high correlation between the Euro and stocks in the last few months, this predicts a full-scale collapse in the stock market at some point in the coming months.

On that note, Gold hasn’t bought into this latest Euro rally in the slightest, breaking out to new all-time highs in both Dollars and Euros, indicating that the flight from paper money continues in a big way. This is confirmed by Silver, which has also recently broken out in both Dollars and Euros.

To conclude, the markets are set to consolidate, if not correct this week. Euro options expiration is over. And the ramp job from last week needs to cool. Whether we’ll get a sideways trading range or a move to the downside all hinges on the Euro’s action, so keep your eyes there for signs of which way we’re headed.

Good Investing!

Graham Summers

http://gainspainscapital.com

PS. If you’re worried about the future of the stock market, I highly suggest you download my FREE Special Report detailing SEVERAL investments that could shelter your portfolio from any future collapse. Pick up your FREE copy of The Financial Crisis “Round Two” Survival Kit, today at: http://www.gainspainscapital.com/MARKETING/roundtwo.html

Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets. 

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

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